Transfer pricing rules are the applicable regulations for transactions between related parties as defined by the Hungarian Act on Corporate Income Tax (CIT). In general we can say that if a company meets at least one of the following criteria, then it will be deemed as related parties for income tax purposes:
- directly or indirectly owns more than 50% of the voting rights in another company
- holds by way of any agreement with another member of the company more than 50% of the voting rights in the company
- is entitled to appoint/dismiss the majority of the executive officers or the supervisory board members of another company
In addition, the Hungarian head office and the foreign PEs/branches, as well as the Hungarian PEs/branches and the foreign head office qualify as related parties; thus, the transfer pricing rules also apply to these enterprises.
Furthermore, the definition of related parties was amended as of January 1st, 2015. As a result of the changes, the concept of common directorship was added to the definition. Thus, even if the ownership (voting) rights of one entity in another entity do not exceed 50%, but the entities in question have the same management, then the two entities are considered related parties and are subject to the obligations prescribed by transfer pricing rules.
The Act on CIT defines the cases when entities are obliged to apply transfer pricing adjustments. According to paragraph 18 of the Act on CIT, transfer pricing adjustment is required if the price used between related parties based on their agreement is lower or higher than the consideration used by independent parties within comparative conditions. The profit before taxation has to be modified by transfer pricing adjustment in the following cases:
- if the profit before taxation is higher due to the agreed consideration between related parties, transfer pricing adjustment has to be made as tax base decreasing items
- if the profit before taxation is lower due to the agreed consideration between related parties, the tax base has to be increased by transfer pricing adjustments
Reduction of the tax base is only allowed if both parties are in possession of a declaration signed by both, declaring the difference between the arm’s length price and the price used, and the other party is subject to Hungarian corporate tax or a similar tax abroad and increase(d) its tax base with the similar amount. The reduction cannot be validated if the related party is considered as a controlled foreign company (CFC).
Transfer pricing adjustments are to be applied irrespective of other tax base increasing and decreasing items.
Download our “2018 Transfer Pricing Overview for Hungary (PDF)” for more information or read more below:
The transfer pricing rules are determined by different legislations in Hungary, as well as by the Double Tax Treaties.
Act LXXXI of 1996 on Corporate Income Tax (CIT) determines the description of affiliated companies and the tax base modifying items related to the arm’s length principle.
The rules of Advance Pricing Agreement (APA) are included in Act CL of 2017 on Taxation, together with the sanctions applicable in case of missing transfer pricing documentation. The details regarding the submission of APA request can be found in Decree No. 48/2017 of the Ministry of Finance on Advance Pricing Agreements.
Act CXXVII of 2017 on VAT prescribes the cases when the market price shall be determined as tax base in spite of the value which the related parties applied.
The details of requirements on transfer pricing documentation are included in Decree No. 22/2009 and Decree No. 32/2017of the Ministry of National Economy on TP Documentation Requirements.
Also, Double Tax Treaties include necessary information when preparing transfer pricing documentation, as they define the place of taxation of the concerned entities.
Arm's length principle
Limited local data is available in Hungary, however, the use of pan-European data is allowed for transfer pricing purposes. The tax authority also uses the data of these data bases for its reviews.
Section 18 of the Corporate Income Tax Act was modified as of January 1st, 2015, to make the interquartile range applicable when determining the arm’s length price range in certain (reasonable) cases. The new regulation is not obligatory in all cases, but it delegates the right of decision about applicability to the tax payer. However, we can state that using of interquartile range is safer than supporting its absence, so in 99% of the cases taxpayers are using it.
The Decree assigns that the taxpayer is obligated to consider all facts and conditions available during contracting, modification of the agreement and at the time of fulfilment, which are relevant for determining the arm’s length price.
However, the legislation defines the cost – benefit principle, based on which the taxpayer cannot be expected to bear disproportionately high costs related to completing the records. It is worth being aware of this principle, because the taxpayers have the possibility to refer to the above mentioned principle in case a fact or a circumstance was not detailed deeper in the documentation due to its high cost burden.
The above does not exempt, however, the taxpayer from the transfer pricing record keeping obligation.
Exceptions from Transfer Pricing
According to the Decree no. 22/2009 on transfer pricing documentation requirements, a company is obliged to prepare transfer pricing documentation if it had transactions with related parties within the given tax year.
There are some cases when the company has no transfer pricing documentation preparation liability, even though there was fulfilment with related party:
- the transaction was made based on agreement with an individual
- the company is considered as small or medium-sized enterprise (according to the Act on CIT)
- the arm’s length price was determined by the tax authority in the form of a resolution as provided by the Rules of Taxation (in the framework of the so called “Advance Pricing Agreement” (APA) – if there was no change in the facts fixed in the APA resolution
- recharge of consideration for the sale of product or service in the same amount to related party(ies) – if the seller or party bearing the cost is not affiliated company
- free cash transfer and takeover between associated companies
- transactions on stock exchange being subject to the Act on Capital Market, and for applying other official price or the fixed price specified by law
- the value of the transaction (on fair market price without VAT) between associated companies does not reach HUF 50 million within the tax year (the contracts which may be consolidated are to be considered together)
When calculating the limit set by the Decree it is important to know that if the annual report is prepared in foreign currency, the exchange rate of Hungarian National Bank valid on the last day of the tax year is to be used to determine the value of related party transactions in Hungarian Forint.
Until the modification of the Decree in 2013, the cumulated value of all fulfilments from the date of the contracting until the end of the tax year had to be considered for determining the transfer pricing obligation. This rule is still relevant because the tax authority may request the documentation within expiration time during an inspection.
According to the Hungarian transfer pricing regulations, the designated methods are:
- the comparable uncontrolled price (CUP) method
- the resale price method
- the cost plus method
- the transactional net margin method (TNMM)
- the profit split method
Hungary does not establish priority of methods – the designated methods are equal. Other methods may be used after the listed ones have been eliminated.
As of 2012, transfer pricing documentation must be prepared for all related-party transactions (with the exception of transactions covered by a valid APA ruling, third-party cost recharges in unchanged amounts in certain cases, and minor transactions). For low value adding services, simplified documentation may be prepared if certain conditions are met.
As of January 1st, 2018, taxpayers may choose to prepare documentation based on the “master file – local file” concept. The documentation regarding FY 2017 can be prepared based on the former rules as well. Applying the new concept is, however, obligatory from FY 2018.
There are no specific rules under the Hungarian regulations regarding the annual updates, however, based on the general rules, the transfer pricing report must be updated if certain conditions have changed in the tested financial year, and those changes have an effect on the pricing mechanism. Furthermore, in a recent change, the Hungarian tax authorities prefer benchmark updates on a yearly basis.
The deadline for finalizing the corporate income tax return is May 31st for calendar year taxpayers. For non-calendar year taxpayers, the filing deadline is the last day of the fifth month following the balance sheet date of the financial year.
Documentation does not have to be submitted to the tax authorities, however, it should be provided immediately upon request. The statutory deadline for the preparation of transfer pricing documentation is the filing date of the corresponding year’s corporate income tax return.
The expiration date of the transfer pricing documentation is five years from the last day of the year when the concerning tax return is due.
Transfer pricing documentation and supporting documentation may be compiled in languages other than Hungarian, but the taxpayer is liable to present a Hungarian translation of documentation prepared in languages other than English, French, and German, at the tax authorities’ request, by the deadline specified.
Consolidated transfer pricing documentation
According to the Decree, as a general rule, companies are obliged to prepare transfer pricing documentation for each transaction separately. However, the Decree gives the possibility for taxpayers to prepare consolidated documentation on transactions meeting the following requirements:
- the subject matter of the agreements and the relevant conditions of the fulfilment of the subject is the same and pre-recorded, or the differences of the conditions are not significant, or
- the agreements are closely related,
provided that the consolidation does not jeopardize the comparability.
In case of choosing the preparation of consolidated documentation, the company has to present the reason for the consolidation in its documentation.
Types of the transfer pricing documentation
As of January 1st, 2010, taxpayers may choose to prepare documentation based on the “stand-alone” Hungarian documentation requirements or follow the EU master file concept (centrally prepared master file and country-specific documentation).
There are three types of transfer pricing documentation which can be prepared for supporting the used pricing method and the price used between the related parties:
Independent transfer pricing documentation
The stand-alone transfer pricing documentation, including only the transactions of the companies concerned, is the most frequently used documentation type prepared by the Hungarian taxpayers.
The compulsory elements of the stand-alone documentation are detailed by the Hungarian Decree no. 22/2009 on transfer pricing documentation requirements.
Common transfer pricing documentation
The common transfer pricing documentation includes two parts:
- the main document – so called master file
- the specific records
The main document presents the general standardized information related to the Intra-Community registered members of the group of companies. The specific records present the agreements between the company and its affiliated companies.
Documentation of low value-adding intra-group services
Simplified transfer pricing documentation can be prepared for transactions with low value-adding if the requirements determined by the Decree are met.
Master file – Local file concept
Hungary adopted the OECD’s new concept and it is obligatory regarding FY 2018 first, and optional for FY 2017.
Advance Pricing Agreements (APA)
Advance Pricing Agreements (APAs) are determined by the Rules of taxation and have been available since January 1st, 2007. The taxpayer has the possibility to request the tax authority to define the method to be applied, considering the facts and conditions and range of prices to determine arm’s length price to be used between the related parties in the future.
The tax authority includes the outcome of the examination in the resolution.
The term of the resolution is a fixed term of three to five years. But it could be extended by an additional three years, based on the request of the involved related parties.
APA filing fee
The official filing fees for an APA, payable to the Hungarian Tax Authority, are 2,000,000 HUF for an unilateral statement. In case of multilateral statement the fee is 2,000,000 HUF multiplied by the number of parties involved.
In case of rejected filing, or in case of withdrawal of the request the 85% of the fee is payable.
In case of request for prolongation or modification of statement the fee is 50% of the originally paid fee.
Fee of personal consultation is HUF 500,000.
If the tax base adjustments required by the tax authority based on transfer pricing rules result in tax default, the standard assessments — tax penalty and late payment interest — will be due in accordance with the general rules.
Furthermore, if the taxpayer fails to present appropriate transfer pricing documentation upon the request of the tax authorities, it may be fined up to HUF 2 million per related-party transaction. In case of repeated violations of the documentation obligation, the taxpayer may be penalized up to HUF 4 million, and in case of repeated default related to the same transfer pricing report, the tax authority may impose default penalty even up to HUF 16 million per related-party transaction.
Late payment interest may be levied based on the additional tax assessed by the tax authority. No late payment interest should be assessed on default penalties levied due to not having appropriate transfer pricing documentation.